Suppose the United States initially has a trade deficit. Then U.S. firms increase their imports from Canada, financing that increase by borrowing from Canada. The current account deficit is now ________ and the capital and financial account surplus is now ________.
A) larger; larger
B) larger; smaller
C) smaller; larger
D) smaller; smaller

Question

Quizplus · Accepted Answer

When U.S. firms increase their imports from Canada, the U.S. current account deficit (which includes trade balances) becomes larger because imports are subtracted in the calculation of the current account balance. Financing the increase in imports by borrowing from Canada means more capital is flowing into the U.S. from Canada, which increases the capital and financial account surplus.

Suppose the United States Initially Has a Trade Deficit